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Pension plan governance is an issue that has attracted a great deal of attention in the last few years. It refers to the structure and processes for overseeing, managing and administering a pension plan to ensure that fiduciary and other obligations are met.

Recognizing the need to improve the operation and governance of supplemental pension plans, the Quebec National Assembly became the first legislative body in Canada to legislate on pension plan governance when it introduced governance measures in An Act to amend the Supplemental Pensions Plans Act, particularly with respect to the funding and administration of pension plans, better known as "Bill30", which passed into law on December13, 2006. The purpose of the new measures is to encourage pension committees to adopt more rigorous practices, which will make it easier for them to meet their fiduciary obligations, such as the duty to act with care and diligence. The most important step that pension committees have to take as a result of these amendments is to adopt internal by-laws by December13, 2007.

This new statutory requirement supplements the guidelines developed by the Canadian Association of Pension Supervisory Authorities ("CAPSA") in 2004. Although the CAPSA guidelines are optional, they still represent the supervisory authorities' expectations of pension committees with respect to governance. Therefore, pension committees should refer to the guidelines when preparing their internal by-laws.

The December13, 2007 deadline for preparing internal by-laws creates an incentive for all pension committees to take stock of their governance practices and review the structure and processes for overseeing, managing and administering the pension plans for which they are responsible. Pension committees should see this as an opportunity to adopt a complete governance program, including all the topics discussed in the CAPSA guidelines, rather than confine themselves to the requirements of the Supplemental Pensions Plans Act ("SPPA") as amended by Bill30.

Internal by-laws set out the rules of operation and the governance structure of the pension committee. Consequently, if pension committees have not already done so, they should now identify their administrative practices, pinpoint the weaknesses in their administration and clearly describe and document the role and responsibilities of those involved in plan administration. Pension committees should also ensure that oversight and accountability mechanisms are in place and operate efficiently.

More specifically, the following ten topics must be addressed in the internal by-laws:

1. the duties and obligations of the committee members;
2. the rules of ethics to which those persons are subject;
3. the rules governing the appointment of the chair, vice-chair and secretary;
4. the procedure for meetings and the frequency of meetings;
5. the measures to be taken to provide professional development to committee members;
6. the measures to be taken to ensure risk management;
7. internal controls;
8. the books and registers to be kept;
9. the rules to be followed when selecting, remunerating, supervising or evaluating delegates, representatives or service providers; and
10. 10. the standards that apply to the services rendered by the committee, namely the standards on communicating with plan members and beneficiaries.

Internal by-laws include basic elements that all pension committees have probably already addressed. However, they add new elements, such as risk management and internal control mechanisms. The above list is obviously not intended to limit the topics that may be addressed and the Régie des rentes du Québec encourages pension committees to add other topics as necessary. For example, internal by-laws may include provisions on the collection and use of personal information or on the archiving of plan members' files.

Pension committees have been given a lot of latitude in the drafting of their internal by-laws since the SPPA does not generally specify how each topic listed above should be dealt with or how detailed the internal by-laws should be.

Risk management and the establishment of internal controls are the two topics of the internal by-laws which will certainly require the most thought by those involved in administering pension plans.

The risks should be identified collaboratively by all those involved in the administration of pension plans so that the exercise is complete and efficient. There should be one or more appropriate management or prevention measures for each risk. By risk, we mean the internal and external events or circumstances which may influence the plan's ability to meet its obligations or which may affect the pension committee. Generally, the principal risks associated with the administration of pension plans can be grouped as follows:

1. risks associated with investments;
2. risks associated with the statutory obligations imposed upon the plan administrator;
3. risks associated with administration of the plan generally;
4. risks associated with the information communicated to plan members;
5. risks associated with the pension plan's financial position;
6. risks associated with pension liabilities (particularly demographic risk and actuarial assumptions);
7. risks associated with the employer and the context in which it operates.

Internal control measures will allow pension committees to have a process and tools to monitor the administration of the plan. As most of the time the administration of plans is essentially delegated or entrusted to the employer or third parties, supervision is the key component of the pension committee's activity. Finally, the rules for the selection, supervision and evaluation of delegatees and service providers should be seen as an occasion to properly document the relationship between these parties and the pension committee.

This new statutory requirement comes at a time when members of pension committees are increasingly concerned about their personal liability. Internal by-laws and the associated governance measures should not be seen simply as a constraint imposed by lawmakers but rather as a way of protecting the members of the pension committee. An analysis of claims related to pension plan administration shows that they deal mostly with breach of fiduciary duties (care, diligence, skill, integrity and loyalty) or failure to comply with applicable legislation. Those against whom such claims are made will, among other things, have to show that they exercised due diligence under the circumstances. In this context, it is probable that, when asked to rule on the fiduciary liability of pension committee members, the courts will first look to see if internal by-laws and appropriate governance measures have been adopted and complied with. This will apply to both defined benefit and defined contribution plans, but more particularly to defined contribution plans, since the members of such plans bear the brunt of any difficulties their plan may run into.

The requirement to adopt internal by-laws by December13, 2007 should thus be seen in a positive light. We believe this exercise will benefit all those involved in the administration of the plan as well as plan members and their beneficiaries. Indeed, drafting the internal bylaws requires a multidisciplinary approach; however, because the personal liability of pension committee members is at stake, particular attention should be given to the legal aspects of the process. In addition, since the exercise is a complex one, pension committees would be well advised to consult professionals who have special expertise in this area. The members of our pension plan and corporate governance teams can assist you in this regard, in particular with the revision of your internal by-laws and the related governance measures.

Julie Paquet

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault LLP or any member of the firm on the points of law discussed.

© Ogilvy Renault LLP 2007 - All Rights Reserved

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Julie Paquet
Montréal
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jpaquet@ogilvyrenault.com
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Martin Rochette
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